A significant estate-planning disadvantage of private corporate ownership is the potential for double taxation at the death of a shareholder.

At death, a shareholder is generally deemed to dispose of capital property, including shares of a private corporation, at fair market value immediately before death unless an available rollover applies. This can produce a capital gain on the deceased shareholder's terminal return.

A second layer of tax can subsequently arise when corporate assets are sold and the corporation's after-tax value is distributed to the estate or beneficiaries. Without appropriate post-mortem planning, tax may therefore arise once at the shareholder level on the deemed disposition of the shares and again at the corporate/shareholder level as corporate value is extracted.

Option B is incorrect because one of the principal advantages of incorporation is limited liability, subject to guarantees, statutory liabilities, and exceptional circumstances. Option C is also incorrect because corporations are not categorically excluded from government assistance programs. Option D does not describe the principal disadvantage being tested and overstates the operation of attribution rules.

Post-mortem strategies such as loss carryback or pipeline planning may be considered to mitigate the potential double-tax exposure, depending on circumstances.

FPII reference/topic: Financial Planning for Small Business — incorporation; shareholder death; deemed disposition; post-mortem taxation and double-tax exposure.

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